As mutual fund asset value in Nigeria keeps trending towards the trillion-naira mark, data from the Securities and Exchange Commission has revealed that the total asset under management of Nigerian mutual funds stood at N783.8 billion as at June 14, 2019. When analyzed by Quantitative Financial Analytics, it was discerned that the continuous increase in mutual fund investment value comes mostly from additional investor contributions.
The analysis also indicates that investors have poured about N195.1 billion into mutual funds since the beginning of the year, while about N57 billion has been withdrawn within the same period.
It is all about Money market funds
Investors keep loving their money market funds as much of the inflows went there, thereby increasing the percentage of money market fund asset in relation to the overall mutual fund asset value. 71% of mutual fund assets in Nigeria (representing N564 billion out of the N783 billion) was invested in money market funds. Only 3.3% of mutual fund assets were invested in equity exposed funds. This underscores the conservative disposition of investors in Nigeria.
[READ FURTHER: A guide to how Mutual Funds work in Nigeria]
In spite of Nigerians’ aversion to risk as indicated by their “over” allocation to money market funds, it is very encouraging to note that since 1991 when the first mutual fund was launched in Nigeria, mutual fund investment has remained virtually in the ascendency.
Mutual Fund to GDP ratio Remains Low
Meanwhile, even though the growth in fund asset is commendable, Nigeria still ranks low in mutual fund to GDP ratio when compared to other African countries and globally. While the latest SEC released Summary of Mutual Fund Net Asset Value (NAV) puts total fund asset at N783 billion, Nigeria’s GDP stood at about N161 trillion as at first quarter of 2019, according to the National Bureau of Statistics. That translates to about $447 billion, at the rate of N360 to the Dollar. Those numbers translate to a 0.49% mutual fund asset to GDP ratio.
Information gathered from the World Bank shows that Nigeria has one of the lowest mutual fund to GDP (MF_GDP) ratio in Africa and even globally. According to the World Bank data, between 2011 and 2014, MF-GDP ratio in Nigeria remained constant at 0.12%, but in 2014, it increased to .14% with a further increase to 0.19% and .21% in 2015 and 2016 respectively. Nigeria is the largest economy in Africa. The second largest economy (South Africa) had an MF-GDP ratio of 63.43% in 2016 according to the World Bank. Morocco had 26.42% MF-GDP ratio in 2009, while Mauritius and Egypt had 4.44% (2015) and 4.64% (2009) respectively. More so, India, which considers itself to be in the lower echelon of MF-GDP ratio had 8.85% in 2016 while Malaysia, a developing country like Nigeria had an MF-GDP ratio of 29.14% in 2016.
[ALSO READ: Mutual Fund Prospectus explained – Part 2]
As sad as the above numbers may seem, the implication is that the situation presents significant untapped potential growth for operators in the Nigerian mutual fund industry. There are currently about 90 mutual funds in Nigeria compared to 2,100 in India. There is, therefore, a yawning gap and crying need to deepen mutual funds investment in the country, just like PenCom is making concerted efforts to deepen pension fund coverage.
As a matter of fact, mutual fund operators and regulators should borrow a leaf from PenCom. The situation looks even worse when considering the fact that out of the 90 mutual funds in Nigeria, Stanbic IBTC Money Market Fund and FBN Money Market Fund together command about 62% of the total assets. About 72% of mutual fund assets are in money market funds that require little or no active management. It is time for Nigerian mutual fund managers to get out of the couch and get creative by launching more funds and reaching more investors.
[READ FURTHER: Understanding Mutual Fund Fees: Management Fee]
Technology to the Rescue
There is no doubt that technology has been of immense help in actualising the extent of financial inclusion that presently exists in Nigeria. That same technology should be harnessed and utilised towards the furtherance of knowledge as well as the creation of interest in mutual funds.
Lack of Transparency is the bane of mutual funds
The damage that the lack of transparency in mutual funds is doing to the industry cannot be overemphasized. For instance, Nigerian mutual funds are very opaque. Daily prices are hard to come by, factsheets are nowhere to be found, fund performance information is missing in action, investors are not sure of what their funds are holding or investing in, neither are the investors sure of the expense ratio of their funds.
In addition to that, the lack of financial products for the mutual funds to invest has resulted in the lack of diversification, which is the hallmark of mutual fund investments. Different mutual funds in Nigeria are so correlated with each other, such that investing in multiple mutual funds to achieve the desired level of diversification leads to increased concentration risk.
High correlation and over concentration has the effect of magnifying losses whenever they occur, which in turn may dissuade investors from investing in mutual funds. Fund managers should begin to look outside Nigeria into foreign investments to broaden their financial product choices and achieve international diversification.
Investor Education Is Necessary
Many people in Nigeria still do not understand how mutual funds work and how they can be used for financial and investment planning. Fund managers and the Government should find a way to educate Nigerians on this financial product with a view to increasing participation.
Covid-19: Companies raise N222 billion in capital during lockdown
Corporate organizations successfully raised at least N222.6 billion from the 24th of March till date.
The COVID-19 pandemic is unarguably the greatest disruption of recent times. Not only has the world been faced with the existence of a real-life plague, but its impact has also been felt across industries, economies, markets, and more. Yet, corporate organizations successfully raised at least N222.6 billion from the 24th of March till date, covering the toughest periods of the economic impact of the pandemic itself as well as the pandemic-induced lockdown.
Across the world, businesses and companies alike have sought out ways to curb the menace that is the pandemic through the introduction of cost-cutting measures to withstand the storm. However, in the midst of this, an array of companies have also sought out ways to raise finance to ensure their sustainability while also leveraging the relatively cheap opportunity to raise capital.
Increase in Listing
Data from the Nigerian Stock Exchange (NSE) reveals corporate bodies and the government have raised capital and facilitated secondary market trading activities worth over N1.8 trillion. A number of securities have also been listed on FMDQ. Methods used cut across Rights Issues, private placements, bond listings, etc., and they have been supposedly geared towards supporting working capital needs of the organizations, facilitating business expansion and more.
Listings over the period include; LAPO Microfinance Bank’s bond worth N6.2 Billion, NewGold ETF valued at N7 Billion, UACN Property Development Plc’s N16 Billion Rights Issue, Dangote Cement Plc’s bond worth N100 Billion, FBNQuest Merchant Bank’s Series-1 N5Bn Bond, Flour Mills’ N30 Billion Series 13 & 14 Commercial Paper programme, Primero BRT Securitisation SPV Plc bond worth N16.1Bn Bond, and the Golden Guinea Breweries Plc’s private placement of N1.2 Billion. Also listed are MTN Nigeria Communications plc’s proposed series of N50 billion and Transcorp Hotel’s N10 billion Rights Issue.
In addition to this, several Government Bonds worth over N797 Billion have also been listed within the past few months. Other companies have also listed capital financial issues include Guinness Nigeria (N5 billion) and United Capital (N20 billion) through commercial papers, also offering low-interest rates to suit the overall trajectory of the economy.
The amounts raised
Of the various amounts listed over the same period, Flour Mills has raised N7 billion. FBNQuest Merchant Bank’s 5 billion issuance was 2.3 times oversubscribed but news reports are not clear as to how much was actually received; UACN Property Development raised N16 billion; Dangote Cement was 1.5 times oversubscribed, raising N155 billion; The Golden Guinea Breweries, Primero BRT Securitisation SPV, and NewGold ETF were all 100% subscribed at N1.2 billion, N16.1 billion, and N7 billion respectively. United Capital raised N5.3 billion in Commercial paper issuance and N10 billion in its Series 1 Bond issuance, and LAPO Microfinance is ongoing. This brings the total amount raised in the period to at least, N222.6 billion.
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The attraction with raising capital in a COVID-19 era
The pandemic has brought about the world’s worst statistics and Nigeria is no exception with rising inflation juxtaposed with lower-than-normal interest rates – and that appears to be the catch. A common phenomenon across these bond listings is that many have been oversubscribed despite COVID-19 headwinds. In other words, with very limited opportunities available across markets, investors have rushed at many of these bonds at their comparatively low coupon rates. Given that these investments are locked at fixed interest rates, companies now have the opportunity to piggyback growth strategies on affordable capital raising. With investors, on the other hand, grappling for opportunities to shield their funds from inflation, the situation appears to take the semblance of a win-win situation.
Why interest rates on treasury bills, bonds crashed
The yoyo between debt and equity is likely to ensue as uncertainty remains in the forex market.
The Nigerian debt market has been faced with a series of challenges, most of which were triggered by the worst pandemic recorded in human history. Its prospects in attracting foreign portfolio investors were dampened as macros on Nigeria’s economy revealed a downtrend in the market, and this trend has only worsened in the past months.
The fixed income market sustained its downward trajectory for the third consecutive month in June 2020 largely driven by excess liquidity as well as an overall scarcity of instruments in the market. Reports from several analysts indicate the demand for fixed income securities has increased considerably over the last 6 months driving down interest rates earned by investors.
Victor Silas an Investment analyst told Nairametrics about the OMO bills liquidity for the month of June. He said, “For June, fixed income rates were liquidity-driven following the ban of locals from OMO and limited investment outlets. OMO bills maturities are creating more liquidity for locals and it is finding its way to the bond market and Treasury bill.
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“The 2050 trading below 11% yield and the 364-day Treasury bill closing at 3.4%. It just tells you there are a lot of liquidity concerns for locals.”
Most foreign portfolio investors based abroad are staying out of naira debt dominated securities; this shows that Nigeria’s debt markets are now controlled by local investors.
Nigeria attracted just $67.9 million in Foreign Portfolio Investment (FPI) inflow for the month of April 2020, the lowest inflow recorded this year. A cursory look at the Central Bank data shows that FPI sharply reversed from $2.30 billion at the beginning of the year (January) to just $67.9 million inflow in April 2020. Nigeria like most emerging markets relies heavily on foreign portfolio investments to shore up its external reserves and manage its exchange rate position.
Portfolio inflow into money market instruments fell from N1.6 billion and N1.4 billion in January and February respectively to just N229 billion and N49 million in April and May respectively. On the flip side, those that still have their investment stuck in Nigeria, have stayed away from any other type of investment except money market instruments such as bonds and treasury bills. Most of the investors are waiting patiently for the central bank to fund their dollar purchase so they can exit.
Emmanuel Orji Emerging Market/ Fixed Income Trader, COMERCIO PARTNERS spoke to Nairametrics on the performance of fixed income securities in June. He said;
“Subsequently, the unexpected reduced sale at the June bond auction of NGN100 billion as against the NGN150 billion originally offered further strengthened the aggressive bullish run in the bond market.
“The bond auction closed relatively strong as a result, with a bid to cover ratio of 3.6x and rates declining by 120bps, 70bps, and 45bps to print at 8.00%, 11.00%, and 12.15% across the 3-year, 5-year, and 30-year maturities respectively. Note: BPS refers to basis points, a financial term for percentages. 100 basis point is equal to 1%.
“As a result, yields for the benchmark securities monitored declined across all maturities on a month-on-month basis, with yields of the sovereign bonds with 3-year, 5-year, 10-year and 20-year maturities declining by 332 bps, 138 bps, 96 bps, and 138 bps to close at 5.64%, 7.13%, 9.76%, and 10.05% respectively.
“Given the amount of idle PFA cash sitting in bank placement (c. NGN1.5 trillion) and the sudden weakness in demand for equities, we expect the buying interest to persist in the near term, which should drive yields lower in the bonds market.”
Nigerian fiscal stakeholders have resorted to borrowing domestically as opposed to seeking for funds abroad, another effect of the pandemic. This is expected to lead to an increase in the yields of FGN bonds in the short and mid-term horizon as the inward plan to seek funds locally intensifies.
Where this leaves equities
Concomitantly, the equities market benefitted from the apparent thirst for asset yielding investments in recent months. As yields for safer investment fell, investors shifted to the equities market taking advantage of the earning season often market by dividend payouts. Most stocks paid dividend yields in double digits following the stock market crash in March 2020.
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But by June the market sell-offs ensued with investors moving funds out to secure stakes in corporate debt securities. The yoyo between debt and equity is likely to ensue as uncertainty remains in the forex market and the country’s stimulus plans.
Some retail investors who spoke to Nairametrics insist they have abandoned the Nigerian Stock Market preferring to trade in cryptocurrencies or US stocks. The proliferation of intech supported investing apps has made cross border investing easier providing access to market far beyond the shores of Nigeria.
Some experts are uncertain of what to expect from money markets in H2 2020
In the meantime, liquidity in the Nigerian banking system is said to be below N100 billion
Money market experts are uncertain over what to expect as the second half of the year takes off. This uncertainty is specifically hovering over the treasury bills and OMO (Open Market Operations) side of the market, according to Constance Onyia, a Fixed Income Dealer with Access Bank Plc.
Speaking to CBN Africa, yesterday, about what is happening in the money markets and what to expect during the second half of the year, Onyia said the CBN’s changing strategy has made it difficult to be predictive.
“Actually, we are expecting OMO auction tomorrow. But being that CBN’s strategy has changed (in the last two months they’ve not been rolling over all the maturities and sometimes they don’t even come for OMO), we don’t know what to expect; if there will be OMO auction tomorrow or not. And even if there’s an auction, they might no rollover everything on offer. So, we see that the strategy has changed a bit and we don’t know what to expect for the month or for the second quarter,” she said.
Meanwhile, when the Head of Fixed Income Trading at United Bank for Africa (UBA) Plc, Bankole Odusanya, was asked the same question, he said “the Debt Management Office has a calendar and what is on play is simply that the exact amount that is maturing is what they plan to offer. If we saw that they increased the amount they wanted to offer, then you could be tinkering with your pricing. So, the amount that is maturing by-weekly (on Thursdays) is what they plan to raise.”
In the meantime, liquidity in the Nigerian banking system is said to be below N100 billion. And because this liquidity level is not excessive, experts do not expect the CBN to come in heavily with OMO maturities. As Odusanya pointed out, the amount of OMO bills by the CBN has reduced significantly over the last few weeks, even as the apex bank now relies more on Cash Reserve Ratio (CRR) to control liquidity.